Wall Street Analyst Lowers GameStop Estimates After Weak Outlook
Before the market open on Monday, GameStop (NYSE:GME) reported holiday sales (9-week period ending December 31) that were below our expectations. Comps were down 0.3% (up 0.3% in the US, down 1.5% internationally).
GameStop lowered FY:11 guidance for comps to down 2.0% to down 1.0% from down 1% to flat, but maintained EPS guidance of $2.82 – 2.92. It also lowered Q4:11 guidance for comps to down 2.0% to down 1.0% from flat to up 2.0%, but maintained EPS guidance of $1.66 – 1.76. In our view, despite weaker-than-expected comps, the company can achieve earnings guidance through share repurchases (2 million shares at an average price of $22.38 over the holiday period, with $329.8 million remaining in its authorization).
Lowering our FY:11 estimates for revenue to $9.62 billion from $9.73 billion, for comps to down 1.3% from down 0.1%, and for EPS to $2.89 from $2.93. Lowering FY:12 estimates for revenue to $9.85 billion from $9.98 billion and for comps to up 2.2% from up 2.4%, but maintaining our $3.30 EPS estimate.
GameStop likely gained console software market share, but lost hardware market share. New software sales were up 9.9%, driven by HD console releases, including Activision Blizzard’s (NASDAQ:ATVI) Call of Duty: Modern Warfare 3, Bethesda Softworks’ Elder Scrolls V: Skyrim, and Ubisoft’s Assassin’s Creed: Revelations. We estimate that new console software sales were up 7% over the last two months of the year, implying share gains for GameStop. New hardware sales were down 19.6% due to no new releases (and Kinect last year), below our estimate of down 15%, implying share losses. Hardware promos at competitors likely hurt GameStop sales as well.
In addition to high-profile software releases, we believe that digital sales (up 60% over the holidays, led by Call of Duty ELITE), used sales (up 3.5%), tablets, and mobile (4% of holiday trade volume) will be strong. Also, we expect new hardware and a manageable comp from Nintendo’s decline.
Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 10x our FY:12 EPS estimate of $3.30. Our price target reflects GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth, and its repurchase program.
Michael Pachter is an analyst at Wedbush Morgan.
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